USD $251 million of debt securities affected
New York, February 08, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Osprey CDO 2006-1 Ltd.:
U.S. $7,500,000 Class X Notes Due January
2014 (current balance of $4,062,500), Upgraded
to Aaa (sf); previously on October 16, 2009 Downgraded to A1
(sf);
U.S.$184,000,000 Class A-1LA Floating
Rate Notes Due 2022 (current balance of $162,955,732),
Upgraded to Baa1 (sf); previously on October 16, 2009 Downgraded
to Ba1 (sf);
U.S.$28,000,000 Class A-1LB Floating
Rate Notes Due 2022 (current balance of $25,352,706),
Upgraded to Ba1 (sf); previously on October 16, 2009 Downgraded
to B1 (sf);
U.S.$34,000,000 Class A-2L Floating
Rate Notes Due 2022, Upgraded to B1 (sf); previously on November
23, 2010 Caa2 (sf) Placed Under Review for Possible Upgrade;
U.S.$15,000,000 Class A-3L Floating
Rate Notes Due 2022, Upgraded to Caa1 (sf); previously on November
23, 2010 Caa3 (sf) Placed Under Review for Possible Upgrade;
U.S.$10,000,000 Class B-1L Floating
Rate Notes Due 2022 (current balance of $9,373,000),
Upgraded to Caa3 (sf); previously on November 23, 2010 Ca (sf)
Placed Under Review for Possible Upgrade.
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from improvement in the credit quality of the underlying portfolio
and increase in the overcollateralization ratios of the rated notes since
the rating action in October 2009.
The deal has benefited from improvement in the credit quality of the underlying
portfolio since the rating action in October 2009. Based on the
December 2010 trustee report, the weighted average rating factor
is 2584 compared to 2771 in August 2009, and securities rated Caa1
and below make up approximately 13% of the underlying portfolio
versus 16.3% in August 2009. The deal also experienced
a decrease in defaults. In particular, the dollar amount
of defaulted securities has decreased to $6.7 million from
approximately $19 million in August 2009.
The transaction is exposed to a significant concentration in mezzanine
and junior CLO tranches in the underlying portfolio. Based on the
latest trustee report, CLO Securities currently held in the portfolio
total about $105.9 million, accounting for approximately
39.4% of the collateral balance. Moody's observes
that recent credit qualities in mezzanine and junior CLO tranches in the
underlying portfolio have stabilized or improved.
Moody's notes that the overcollateralization ratios of the rated notes
have improved in part due to delevering of the Class A-1LA and
A-1LB Notes, which have been paid down by approximately 8.5%
or $17.6 million since the rating action in October 2009.
Available principal proceeds and excess spread are being diverted to pay
down the Class A-1LA and A-1LB Notes as a result of continued
failure of the Class B-2L overcollateralization ratio test.
Furthermore, the overcollateralization ratios have also improved
due to a decrease in the number of defaulted CLO tranches. A number
of CLO tranches were defaulted and carried at depressed market values
in the rating action in October 2009 but are currently treated as performing
securities due to improved credit qualities. As of the latest trustee
report dated December 20, 2010, the Class A, Class B-1L,
and Class B-2L overcollateralization ratios are reported at 117.36%,
112.9%, and 99.62%, respectively,
versus August 2009 levels of 108.69%, 104.83%,
and 92.67%, respectively.
The rating actions on the Class X Notes and Class A-1LA Notes in
October 2009 took into consideration the increased risk of an event of
default, which has been mitigated since the last rating action.
This is reflected in part in the upgrade rating actions on the Class X
and A-1LA Notes.
Due to the impact of revised and updated key assumptions referenced in
"Moody's Approach to Rating Collateralized Loan Obligations" and "Annual
Sector Review (2009): Global CLOs," key model inputs used
by Moody's in its analysis, such as par, weighted average
rating factor, diversity score, and weighted average recovery
rate, may be different from the trustee's reported numbers.
In its base case, Moody's analyzed the underlying collateral pool
to have a performing par and principal proceeds balance of $278.3
million, defaulted par of $7.7 million, a weighted
average default probability of 35.89% (implying a WARF of
4375), a weighted average recovery rate upon default of 29.8%,
and a diversity score of 47. These default and recovery properties
of the collateral pool are incorporated in Moody's cash flow model analysis
where they are subject to stresses as a function of the target rating
of each CLO liability being reviewed. The default probability is
derived from the credit quality of the collateral pool and Moody's expectation
of the remaining life of the collateral pool. The average recovery
rate to be realized on future defaults is based primarily on the seniority
of the assets in the collateral pool. In each case, historical
and market performance trends and collateral manager latitude for trading
the collateral are also factors.
Osprey CDO 2006-1 Ltd. issued on December 13, 2006,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans and CLO securities.
The principal methodology used in these ratings was "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009.
Moody's Investors Service did not receive or take into account a third-party
due diligence report on the underlying assets or financial instruments
related to the monitoring of this transaction in the past six months.
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 2.3.2.1 of the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009. In addition, due to the low diversity of
the collateral pool, CDOROM 2.6 was used to simulate a default
distribution that was then applied as an input in the cash flow model.
In addition to the base case analysis described above, Moody's also
performed sensitivity analyses to test the impact on all rated notes of
various default probabilities. Below is a summary of the impact
of different default probabilities (expressed in terms of WARF levels)
on all rated notes (shown in terms of the number of notches' difference
versus the current model output, whereby a positive difference corresponds
to lower expected losses), assuming that all other factors are held
equal:
Moody's Adjusted WARF - 20% (3500)
Class X: 0
Class A-1LA: +2
Class A-1LB: +2
Class A-2L: +3
Class A-3L: +3
Class B-1L: +3
Moody's Adjusted WARF + 20% (5250)
Class X: 0
Class A-1LA: -3
Class A-1LB: -2
Class A-2L: -2
Class A-3L: -2
Class B-1L: 0
Moody's notes that this transaction is subject to a high level of macroeconomic
uncertainty, as evidenced by 1) uncertainties of credit conditions
in the general economy and 2) the large concentration of speculative-grade
debt maturing between 2012 and 2014 which may create challenges for issuers
to refinance. CDO notes' performance may also be impacted by 1)
the manager's investment strategy and behavior and 2) divergence in legal
interpretation of CDO documentation by different transactional parties
due to embedded ambiguities.
Sources of additional performance uncertainties are described below:
1) Recovery of defaulted assets: Market value fluctuations in defaulted
assets reported by the trustee and those assumed to be defaulted by Moody's
may create volatility in the deal's overcollateralization levels.
Further, the timing of recoveries and the manager's decision to
work out versus sell defaulted assets create additional uncertainties.
Moody's analyzed defaulted recoveries assuming the lower of the market
price and the recovery rate in order to account for potential volatility
in market prices.
2) Other collateral quality metrics: The deal is allowed to reinvest
and the manager has the ability to deteriorate the collateral quality
metrics' existing cushions against the covenant levels. Moody's
analyzed the impact of assuming lower of reported and covenanted values
for weighted average rating factor, weighted average spread,
weighted average coupon, and diversity score. In addition,
as part of the base case, Moody's considered a lower diversity score
due to the large concentration of CLO tranches.
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our web site, at www.moodys.com/SFQuickCheck.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Shan Lai
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Jian Hu
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades the ratings of CLO notes issued by Osprey CDO 2006-1 Ltd.
